Weekly 2018 Week 19 WEEK AHEAD. Market Research Czech Republic & Eurozone. May

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1 Weekly 218 Week 19 MARTIN LOBOTKA, (+42) , CALENDAR DAY DATE TIME (CET)* MARKET RELEASE CONSENSUS** 42FS Tuesday 15-May 8: GER (Preliminary) GDP, 2Q18, q/q.4% N/A 15-May 9: CZ (Preliminary) GDP, 2Q18, q/q.7%.6% 15-May 11: EMU Industrial production, Mar'18, y/y 3.7% N/A 15-May 11: EMU (Preliminary) GDP, 2Q18, q/q.4% N/A Wednesday 16-May 11: EMU (Final) Headline / Core HICP, Apr'18, y/y.7/1.2% N/A Friday 18-May 9: CZ Industrial PPI, Apr'18, y/y.% N/A 18-May 9: CZ 18-May 1: EMU 18-May 1: EMU * LOCAL TIME IS CET ** (REUTERS/ BLOOMBERG) POLL MAY 218 AUCTIONS Export / Import Price, Mar'18, y/y Trade balance, Mar'18, EUR bn. Current Account, Mar'18, EUR bn. N/A N/A 21.1 N/A N/A N/A WEEK AHEAD First estimate of 1Q18 GDP data from Germany and Czech Republic, and April import prices are the top releases this week. 1Q18 GDP data for Czech Republic and Germany will be released tomorrow. For Germany, monthly data from industry and retail indicate noticeable slowdown of growth in 1Q18 as against.6% quarterly expansion seen in 4Q17: the forecast is for.4% q/q, and I would add it is more likely to be less than that than more. NAME DATE OF AUCTION DATE OF ISSUE MATURES ON AMOUNT OFFERED* COUPON SPP May 4-May 2-Nov-18 CZK -5 bn. N/A CZGB ** 9-May 11-May 25-Oct-23 CZK 5 bn. max,45% CZGB ** 9-May 11-May 1-Feb-27 CZK 5 bn. max,25% CZGB ** 9-May 11-May 4-Dec-36 CZK 2 bn. max 4,2% SPP May 11-May 9-Nov-18 CZK -5 bn. N/A SPP May 18-May 16-Nov-18 CZK -5 bn. N/A CZGB ** 23-May 25-May 23-Feb-21 CZK 5 bn. max,75% CZGB ** 23-May 25-May 26-Jun-26 CZK 5 bn. max 1,% CZGB ** 23-May 25-May 23-Jul-29 CZK 5 bn. max 2,75% SPP May 25-May 23-Nov-18 CZK -5 bn. N/A SPP May 1-Jun 3-Nov-18 CZK -5 bn. N/A * FOR T-BILLS, THIS IS MAXIMUM AMOUNT PER PRIMARY DEALER. ** MINFIN CAN CHANGE THE ISSUE AT THE LATEST AT THE DAY OF THE AUCTION ANNOUNCEMENT FOR ONE WITH SIMILAR MATURITY. THOUGHT OF THE WEEK WHAT A DIFFERENCE A YEAR MAKE: I REMEMBER CLEARLY WHEN ARGENTINE SOLD 1 YEAR BOND THAT WAS 3.5X OVERSUBSCRIBED THIS TIME LAST YEAR AND FT TRIED TO EXPLAIN THAT For Czech Republic, I expect slowdown in dynamics too, to.6% q/q (from.8% in the last quarter of last year). Neither Germany, nor Czech Republic will release structure of the growth this week so it will still be a guess game as to what the exact structure of growth was. There will be a release of April 218 Czech import prices as well. This is important to see whether the dampening effect of import prices on the domestic price level continues. Since part of that effect in last 12 months was due to stronger CZK, I expect March should not see further decline in import prices like what we saw throughout 217 and early 218. But since Eurozone inflationary pressures remain non-existent, I don t expect import prices to begin to rise either. 42 Financial Services Market Research Weekly 218 Week 19 1

2 WEEK BEHIND Czech demand inflation dynamics quickened further in April Retail sales were slow in March, but what s truly strange are car sales Czech industry rebounds, but manufacturing continues to lag German orders continue to fall, ill omen for our industry for 2Q EURCZK SPIKED TO 25.6 ON A LOW BANK- HOLIDAY LIQUIDITY EURCZK FX Another banking-holiday, hence another low liquidity, hence another short-lived spike in EURCZK EURCZK spiked to 25.6 mid last week before returning to 25.5 shortly thereafter. 4-May 7-May 8-May 9-May 1-May 11-May FI CZECH 1Y YIELDS RISE 1 BPS. ON HIGHER INFLATION Czech 1Y yields rose 1 bps on higher-thanexpected inflation GERGB 1Y, % CZGB 1Y, % Other than that, nothing else happened. 3-Sep Oct Oct Nov Nov-17 9-Dec Dec-17 6-Jan-18 2-Jan-18 3-Feb Feb-18 3-Mar Mar Mar Apr Apr May Financial Services Market Research Weekly 218 Week 19 2

3 CZECH ECONOMY CZECH DEMAND INFLATION QUICKENS FURTHER AT THE BEGINNING OF 2Q Nov-14 Jan-15 Demand inflation, m/m % Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 3M average May-16 Jul-16 CORE RETAIL SALES SLOWED DOWN IN MARCH, BUT I EXPECT THAT TO BE TRANSITORY Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 Czech annual inflation rose more than expected in April, the reason being faster monthly growth of demand inflation and of oil prices. Annual monetary policy relevant inflation rose to 1.8% from March 1.6% and thus is now only marginally below the CNB target of 2%. The monthly increase was.3% m/m whereas price level stagnated in April of 217. The April 218 growth was the reflection of quicker oil prices (1.4% monthly gain as opposed to -.3% m/m in April of 217) and somewhat quicker demand inflation (.5% vs.4%). In the latter case, though, most of that increase is due to seasonal increase of prices of clothing and footwear. That by itself is certainly nothing dramatic, but the demand inflation (which y/y stayed at 1.8%, just like in March) did rise 1% over last three months, a clear and undisputed acceleration from the beginning of the year. Although this is to a good extent due to still rising house prices (i.e., due to imputed rents), coupled with the weaker than expected CZK it could bring about, were it to continue in the coming three months, the earlier hike than what recent forecast of CNB expects. I still, however, think that there will be further slowdown in Eurozone growth momentum and that it will start filtering into Czech economy. Therefore, though the April demand inflation present a proinflationary risk to my view on Czech rates, I don t change it just yet Retail sales without cars, fuel, food, % y/y (WDA) 3M average Czech retail sales slowed in March, and although I wouldn t read much into this just yet, it is another thing to watch more carefully now /26 6/26 11/26 4/27 9/27 2/28 7/28 12/28 5/29 1/29 3/21 8/21 1/211 6/211 11/211 4/212 9/212 2/213 7/213 12/213 5/214 1/214 3/215 8/215 1/216 6/216 11/216 4/217 9/217 2/218 Czech core retail sales (i.e., no fuel, no cars, no food) fell to just 5% y/y (WDA). Although this is surprising, nothing else indicates this should be the beginning of the new trend. See, this happens now and then - last time it occurred last October when 42 Financial Services Market Research Weekly 218 Week 19 3

4 CAR SALES REMAIN PERPLEXINGLY WEAK Car sales (cars+repairs), % y/y (WDA) 3M average 12/21 4/211 8/211 12/211 4/212 8/212 12/212 4/213 8/213 12/213 4/214 8/214 12/214 4/215 8/215 12/215 4/216 8/216 12/216 4/217 8/217 12/217 growth rate also fell precipitously to 5%, only to return to double digit growth in the following month. It looks more like some kind of a problem with adjustment of the data I cannot think of how, but the different timing of Easter could have had an impact. We ll see next month when retail sales for April are released whether this was one off or not, but considering continuing strong wage growth, confidence and labor market tightness, I am more than certain this won t be repeated. What is more worrisome and more perplexing is the persistent weakness in car sales. These increased for the first time this year, but only imperceptibly so (+.2% m/m), and the growth came after two declines in the previous months (3.4% m/m in February and.1% m/m in January) and after weak growth (2.3%) in 217. I still cannot come up with the explanation for this: nothing else in the data points in that direction. Industry recovered in March, but mostly outside of the manufacturing. Having fallen in February (-1.3% m/m) and January (-.2% m/m), the overall industrial production rebounded in March: 1.4% m/m (5.5% y/y) was, however, enough only to push quarterly growth in 1Q18 to.4% (as against 4Q17). That was substantially slower than 4.2% q/q growth seen in 4Q17. And what makes the March result less of a success is the fact that the growth was predominantly due to 8.5% monthly rise in the utilities, i.e. the production of electricity, heating. In manufacturing, the general weakness persisted: after fall of 3.2% m/m in February (and growth of 2% in January), manufacturing rose just.5% m/m (5.1% y/y), meaning the manufacturing output in 1Q18 was actually lower than in 4Q17. And although the PMI stabilized in Czech Republic, the momentum keeps slowing to the west of us. That and the weak 1Q18 make the repeat of 217 performance (5.7% y/y) highly unlikely: I reckon Czech industry will grow at about 3.5-4% this year. 42 Financial Services Market Research Weekly 218 Week 19 4

5 ORDERS IN GERMAN INDUSTRY CONTINUE TO DECLINE German industrial orders (3-month average of m/m growth rates) From outside the EMU From the rest of EMU Domestic GERMAN INDUSTRY GREW 1% M/M IN MARCH, BUT THAT IS NOT ENOUGH IN LIGHT OF WEAK PERFORMANCE SINCE DECEMBER EUROZONE ECONOMY German industry continues to lose steam. Orders fell for the third time in a row in March. After 3.5% decline in January, February saw -.2% m/m and March -.9% m/m. Foreign non-euro orders fell in all three months this year (domestic ones and foreign euro orders fell in two out of three months of 1Q18) so it appears the cold is coming from outside the Eurozone. For ECB, the implication is that QE might have to stay a little longer. For Czech Republic this release only reinforces the forecast made few lines above here regarding the industry and is another confirmation that the best is already behind us in this cycle in Eurozone, and hence in Czech Republic. CNB should take notice. And the fact that German industry, after three weak months, finally rose meaningfully (1% m/m) in March doesn t change that M average GER industry, % m/m (real, SA,WDA) See, one percent monthly gain does not compensate for February decline of 1.7% m/m, or for the weak growth in the previous two months (-.4% and +.1% growth rates in December 217 and January 217, respectively). Therefore, considering the weak orders that are about to feed into actual production numbers, March reading, while on the surface optimistic, will, in retrospect, look like clear one-off. Next two months don t look so great. Elsewhere in Eurozone, it was also good, but again: looking forward there aren t may reasons to be that optimistic. French industry fell short of the expectations when it recorded a fall of.4% m/m instead of the growth of the same magnitude, but Spain and Italy made up for that. Spain rose 1.2% m/m, beating forecast (-.1% m/m) by a huge margin, and so did Italy (1.2% vs..5% m/m). The March Euro-area wide figure will thus not be all that weak when released tomorrow but considering the orders in 42 Financial Services Market Research Weekly 218 Week 19 5

6 Germany and general weakening of leading indicators, I don t see how we could see quicker growth of industry in 2Q18 and 3Q18 than in 1Q Financial Services Market Research Weekly 218 Week 19 6

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8 MARKETS MM / IRS % bps. % ASW spread* CZGB** 3M PRIBOR 6M PRIBOR 2Y 5Y 7Y 1Y Actual M M M Y 3Y 4Y 5Y 7Y 1Y Actual M M M Y 3Y 4Y 5Y 7Y 1Y Actual M M Actual -3M -6M 3M 6M 2Y 5Y 7Y 1Y PRIBOR PRIBOR Actual -3M -6M 2Y 3Y 4Y 5Y 7Y 1Y Actual -3M -6M FX -6M EURCZK EURPLN EURHUF EURRON EURTRY EURUSD Actual M M M Y 3Y 4Y 5Y 7Y 1Y EURCZK As of Sunday night * Spreads to generic bonds ** Generic bond CONTACTS MARTIN LOBOTKA, ANALYST RESEARCH (+42) , MLobotka@42fs.com Research@42fs.com AVAILABLE AT THOMSON REUTERS EIKON MESSENGER PREVIOUS ISSUES OF WEEKLY AND OTHER REPORTS ARE AVAILABLE HERE 42 Financial Services Market Research Weekly 218 Week 19 8

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